Mortgage and dismemberment of ownership: securing financing against bare ownership or usufruct

A bank asked to finance the acquisition of bare ownership (nue-propriété), or an investor considering a loan to a usufructuary, faces a question that is rarely anticipated: what does the mortgage security actually cover when the property is dismembered? Dismemberment (démembrement) splits ownership into two separate real rights, each of which can be transferred and encumbered separately, but whose value and durability follow opposite logics. A mortgage granted over a usufruct (usufruit) can disappear overnight on the death of the usufructuary, while a mortgage over bare ownership encumbers a right that carries no immediate enjoyment and is difficult to enforce. This analysis sets out what each holder can effectively give as security, the risks specific to each configuration, and the contractual strategies that allow the lender to secure its claim over a dismembered property in the long term.

Dismemberment of ownership: two real rights, two mortgageable bases

The right of ownership traditionally comprises three attributes: usus (the right to use the property), fructus (the right to receive its fruits) and abusus (the right to dispose of it). Article 544 of the French Civil Code defines ownership as the right to enjoy and dispose of things in the most absolute manner. Dismemberment separates these attributes between two persons. Common questions on this mechanism and its uses in estate planning are addressed in our FAQ on the dismemberment of real property ownership.

The usufructuary holds the usus and the fructus. Article 578 of the French Civil Code defines usufruct as the right to enjoy things owned by another, as the owner himself would, but on condition of preserving their substance. The usufructuary may live in the property, let it and receive the rent, but may not freely dispose of it to the detriment of its substance.

The bare owner (nu-propriétaire) retains the abusus, that is, the right to dispose of the substance of the property, but is deprived of all enjoyment for as long as the usufruct lasts. The bare owner holds encumbered ownership, which is destined to become full and complete again when the usufruct ends.

These two rights are autonomous real rights in immovable property. Each may be sold, given, contributed to a company and, above all, mortgaged separately. This is the point on which the whole issue of financing a dismembered property turns: the lender never takes security over the property itself, but over one of the two rights, each of which has its own base and its own lifespan.

The origin of the dismemberment determines the risk

The configuration of the dismemberment is never neutral for the lender. A life usufruct, reserved by a donor for himself on a gift of the bare ownership, will end on the death of the usufructuary, on a date that is by nature uncertain. A temporary usufruct, created for a fixed term (often found in dismemberment investment structures, where an institutional landlord holds the usufruct for fifteen or twenty years), has by contrast a known end date. The application of temporary usufruct to units in investment companies is examined in our article on SCPI units held under temporary dismemberment of ownership.

This distinction directly governs the assessment of risk. A life usufruct granted to an elderly person offers a fragile security base with a short life expectancy; a temporary usufruct over a let building backed by a social landlord offers far greater visibility. Before any credit decision, analysis of the instrument creating the dismemberment is essential.

What the usufructuary can mortgage

Article 2397 of the French Civil Code, resulting from Ordinance No. 2021-1192 of 15 September 2021 reforming the law of security interests, which came into force on 1 January 2022, lists the assets that may be mortgaged. It expressly refers to the usufruct of immovable property and its accessories for the period of its duration. The usufruct of a building is therefore, beyond doubt, an asset that can be mortgaged.

The usufructuary may thus give the right as security for a loan, for example to finance improvement works that the usufructuary is not legally obliged to carry out (the usufructuary bears only maintenance repairs, major repairs falling on the bare owner under Article 605 of the French Civil Code). An investor who has acquired a temporary usufruct of let property may likewise mortgage it to finance that acquisition.

The structural weakness: the mortgage ends with the usufruct

The text is explicit: the mortgage encumbers the usufruct for the period of its duration. Article 617 of the French Civil Code provides that usufruct ends, among other grounds, on the death of the usufructuary and on the expiry of the period for which it was granted. When it ends, the usufruct is not transferred: it disappears, and the bare owner recovers full ownership by operation of law alone.

The consequence for the lender is drastic. A mortgage granted over a life usufruct ends on the death of the usufructuary, without the security passing to the full ownership reconstituted in the hands of the bare owner. The mortgagee simply loses its base. This feature makes a mortgage over a life usufruct particularly uncertain: the security is indexed to the length of a person's life.

Take the example of a usufructuary aged seventy-five who mortgages the usufruct to secure a loan repayable over fifteen years. If death occurs at eighty, when only half of the principal has been repaid, the lender has no real security left and is an unsecured creditor (créancier chirographaire) in an estate whose assets no longer include the property, which has passed to the bare owner. The risk of reverse longevity falls entirely on the creditor.

Enforced sale of a mortgaged usufruct

Even before it ends, enforcing a mortgage over a usufruct remains difficult. In the event of default, the creditor can seize and sell only the usufruct, never the full ownership. Yet the market for usufruct on its own is narrow: few buyers look for a right of enjoyment of uncertain duration, without control of the substance. The discount applied on a forced sale is considerable, and the price obtained rarely covers the debt.

What the bare owner can mortgage

The bare owner holds a real right in immovable property falling within the category of immovable property in commerce referred to in Article 2397 of the French Civil Code. The bare owner may mortgage the bare ownership, a frequent transaction where an acquisition under dismemberment is financed by credit, in particular in investment strategies where the buyer acquires bare ownership at a discount, leaving the usufruct with a landlord for a fixed period.

The major advantage: transfer to the full ownership

Unlike usufruct, bare ownership is not a right destined to end. It is bound to grow stronger. When the usufruct ends, the bare owner recovers the usus and the fructus and becomes full owner, by consolidation, without any further formality and without transfer duty on a sale for consideration.

A mortgage granted over the bare ownership does not disappear on that occasion: it follows the right it encumbers and extends to the reconstituted full ownership. The mortgagee's base is thus mechanically enlarged by the usufruct that has ended. This is the exact opposite of the position of a mortgage over a usufruct. Time works in favour of the lender secured on the bare ownership.

This feature makes a mortgage over bare ownership a structurally more robust security, provided that a delay is accepted. As long as the usufruct subsists, the realisation value of the bare ownership remains reduced; but the prospect of the full ownership being reconstituted gives the security a solidity that usufruct will never have.

The temporary limit: the difficulty of immediate enforcement

The downside lies in liquidity during the period of dismemberment. If the bare owner defaults before the usufruct ends, the creditor can seize and sell only the bare ownership. The buyer will have to wait until the rights are reunited to enjoy the property. A market for bare ownership alone exists, in particular among wealth-management investors, but it applies a discount proportionate to the remaining duration of the usufruct and to the age of the usufructuary.

A mortgage over the full ownership: the joint agreement of both holders

The strongest security over a dismembered property is a mortgage over the full ownership. Neither holder can do this alone: the bare owner can charge only the bare ownership, and the usufructuary only the usufruct. Only the combined consents of the bare owner and the usufructuary make it possible to create a mortgage covering all the rights, that is, the full ownership of the property.

This joint mortgage gives the lender a complete base, independent of the fate of the usufruct. On enforcement, the creditor has the property sold as full ownership, which removes the dismemberment discount and maximises the price. It is the configuration sought whenever the amount of the credit is significant.

Its implementation nevertheless requires both holders to agree to commit their respective rights as security for the same debt. This raises questions of balance: does the usufructuary agree to secure a loan taken out in the interest of the bare owner, or the reverse? The drafting of the instrument must clarify the cause of each party's commitment, the position as to recourse between them and, where appropriate, the arrangement of a third-party security over assets (cautionnement réel) given by one in favour of the other. A contractual mortgage must in any event be granted by notarial deed (Article 2409 of the French Civil Code) and registered at the land registry (service de la publicité foncière) in order to be enforceable against third parties and to rank.

The lender's strategies for securing its guarantee

Faced with these constraints, the creditor has several levers to strengthen its position over a dismembered property. These techniques are combined according to the configuration of the financing.

Requiring a mortgage over the full ownership

The first precaution is not to settle for a mortgage over a single dismembered right where the amount of the credit justifies more. Obtaining the joint agreement of the usufructuary and the bare owner to mortgage the full ownership neutralises the uncertainty as to when the usufruct will end and removes the enforcement discount. This is the approach to favour where the dismemberment results from a family acquisition and both holders have a common interest in the financing.

Backing a mortgage over a usufruct with death cover

Where the security necessarily relates to a life usufruct, the risk of the usufruct ending on death can be transferred to an insurer. Taking out life insurance on the usufructuary, in an amount at least equal to the outstanding principal and assigned to the lender, makes it possible to offset the loss of the real security by the payment of a capital sum. This insurance assignment becomes the backbone of the lender's protection, the mortgage over the usufruct retaining only a secondary role. The age and state of health of the usufructuary then determine insurability and the cost of the premium.

Aligning the term of the loan with the term of the usufruct

For a temporary usufruct, aligning the maturity of the loan with the remaining duration of the usufruct greatly reduces the risk. If the credit is repaid in full before the scheduled end of the usufruct, the ending of the usufruct deprives the lender of no useful security, the debt having already been discharged. This alignment of timing is an elementary precaution in financing let usufructs of fixed duration.

Combining the mortgage with complementary security

The lender may back the mortgage with additional guarantees: a personal guarantee from the manager or the shareholders where the borrower is a company, a pledge over the shares of a société civile immobilière (French property holding company) holding the dismembered rights, or an assignment of the rents received by the usufructuary (délégation de loyers). The assignment of rents is of particular interest in financing a let usufruct: it allows the income to be applied directly to repaying the loan, regardless of the realisation value of the usufruct. On the merits of encumbering the holding company rather than the building itself, see our analysis of the pledge of SCI shares.

Anticipating the transfer of the security on conversion or disposal

Dismemberment is not fixed. The usufructuary and the bare owner may decide to sell the property as full ownership, to convert the usufruct into an annuity, or to transfer their rights. The loan agreement and the mortgage deed must provide for the fate of the security in those cases, in particular by providing for the creditor's right to pass to the price or to the share due to its debtor, through real subrogation (subrogation réelle). A contractual clause prohibiting disposal, or a requirement for the lender's prior consent to any transfer, may complete the arrangements.

Valuing the dismembered rights: an essential step before the credit decision

The value of a usufruct or of a bare ownership cannot be deduced mechanically from that of the full ownership. Two approaches coexist and do not give the same results.

Article 669 of the French General Tax Code (Code général des impôts) sets a tax scale based on the age of the usufructuary, intended for the calculation of transfer duties. Under this scale, the usufruct of a person aged between seventy-one and eighty (completed years) is valued at 20% of the value of the full ownership, the corresponding bare ownership being worth 80%. This scale is purely fiscal and does not necessarily reflect the real economic value of the rights.

The economic valuation, or financial method, discounts the expected flows of enjoyment (rents or use value) over the probable duration of the usufruct. It frequently results in a higher valuation of the usufruct than under the tax scale, in particular for a let usufruct producing high income. To assess its real security base, the lender should favour the economic approach, which is closer to realisation value, and use the Article 669 scale only for the tax purposes of the transaction.

This valuation must take into account the probable remaining duration of the usufruct, the nature and profitability of the property, and the liquidity discount affecting any dismembered right sold on its own. An independent expert report, distinguishing the value of the full ownership, the value of the usufruct and the value of the bare ownership, is an essential document in the credit file.

Land registration, ranking and enforceability

Like any contractual mortgage, a mortgage encumbering a dismembered right is enforceable against third parties and ranks only from its registration at the land registry for the place where the property is situated. Ranking determines the order in which creditors are paid on enforcement. The lender must check the prior mortgage position of the right concerned: a usufruct or a bare ownership may already bear an earlier registration, which takes priority over its own.

Particular care is needed where the dismemberment concerns a property previously encumbered as full ownership. If a mortgage was registered over the full ownership before the dismemberment, it continues to encumber all the rights, including after their division. Conversely, a mortgage registered after the dismemberment over the usufruct alone never extends to the bare ownership, and vice versa. The chronological order of registrations and the exact base of each security must be established precisely before any commitment.

Conclusion: favour bare ownership and joint agreement, be wary of a usufruct on its own

Over a dismembered property, not all mortgages are equal. A mortgage over a life usufruct is the most fragile security in real estate law: it ends with the right it encumbers, without passing to the reconstituted full ownership, and makes sense only when backed by death cover or aligned with a temporary usufruct of controlled duration. A mortgage over bare ownership is structurally stronger, because it extends to the full ownership on the death of the usufructuary, but it suffers from reduced liquidity during the period of dismemberment. The optimal configuration remains the joint mortgage of the usufructuary and the bare owner over the full ownership, which alone offers a complete base and enforcement at full value.

For a bank or an investor, a credit decision on a dismembered property cannot be taken without three prior checks: the nature and duration of the usufruct, as established by the instrument creating the dismemberment; the economic valuation of the right actually charged, distinct from its tax value; and the combination of the mortgage with complementary security suited to the risk of the usufruct ending. Before any release of funds, have the dismemberment instrument and the exact base of the security reviewed by a suitably experienced adviser, so as never to confuse the value of the property with the value of the right actually taken as security.

Frequently asked questions

Can a usufructuary mortgage the property alone?

No. The usufructuary can mortgage only the usufruct, never the full ownership of the property. Article 2397 of the French Civil Code allows the usufruct of a building to be mortgaged for the period of its duration. To encumber the full ownership, the agreement of the bare owner is essential. A mortgage granted in this way ends with the usufruct, in particular on the death of the usufructuary.

Does a mortgage over bare ownership extend to the full ownership on the death of the usufructuary?

Yes. When the usufruct ends, the bare owner recovers full ownership by consolidation, without any further formality. The mortgage that encumbered the bare ownership follows that right and automatically extends to the reconstituted full ownership. This is the major advantage of a mortgage over bare ownership compared with a mortgage over a usufruct, which disappears when the right ends.

What happens to a mortgage granted over a usufruct on the death of the usufructuary?

It ends. The usufruct disappears on the death of its holder under Article 617 of the French Civil Code, and the mortgage does not survive the right it encumbered. It does not pass to the full ownership that has reverted to the bare owner. The creditor then loses its real security and becomes a mere unsecured creditor. This is why life insurance on the usufructuary is generally required.

How is a usufruct valued to determine the base of a security?

Two methods coexist. The tax scale in Article 669 of the French General Tax Code fixes the value according to the age of the usufructuary (for example 20% for a usufructuary aged 71 to 80, completed years). The economic valuation discounts the expected income over the probable duration of the usufruct and better reflects realisation value. A lender should favour the economic approach, often higher for a let usufruct, and reserve the tax scale for the calculation of duties.

Must a mortgage over a dismembered property be registered?

Yes. Like any contractual mortgage, it must be granted by notarial deed (Article 2409 of the French Civil Code) and then registered at the land registry in order to be enforceable against third parties and to rank. Registration determines the order in which creditors are paid on enforcement. The mortgage position of the right concerned should be checked, since an earlier registration over the same usufruct or the same bare ownership would take priority over the new security.

What is the strongest security over a dismembered property?

The joint mortgage of the usufructuary and the bare owner over the full ownership. It offers a complete base, independent of the fate of the usufruct, and allows the property to be sold as full ownership in the event of default, without a dismemberment discount. It requires the agreement of both holders and precise drafting setting out the cause of each party's commitment and the recourse between them.

Can the purchase of bare ownership be financed by a mortgage loan?

Yes. The bare owner may mortgage the bare ownership to secure the loan financing its acquisition, in particular in dismemberment investment structures where the usufruct is transferred for a fixed term to a landlord. The lender must take into account the low liquidity of bare ownership during the period of dismemberment and, ideally, align the maturity of the loan with the remaining duration of the usufruct in order to benefit from the reconstitution of the full ownership.